Washington, D.C., February 5, 2015 - Transwestern, along with its research affiliate, Delta Associates, and their sponsors, Baker Tilly and PNC Real Estate, today release the real estate projections and market analysis revealed at the 18th annual Washington, D.C., TrendLines® event, held Feb. 5 at the Ronald Reagan Building and International Trade Center. Opportunities in the Washington, D.C., commercial real estate market were outlined by Delta CEO Greg Leisch. And attendees received a copy of the 2015 edition of the TrendLines® publication, Trends in Washington, D.C. Commercial Real Estate – The Next Generation of Growth, that examines trends of 2014 and pivotal forces expected to affect the region’s economy and commercial real estate in 2015 and beyond.
“This year is likely to be one of transition for the Washington metro area’s economy and commercial real estate market,” said Leisch. “We are likely to see a transition from weak to stronger job growth, from robust apartment deliveries to a new focus on condominiums and mixed-use development, and from experiential real estate as a new niche to a full-fledged template of how to develop.”
Delta’s presentation on the state of the market addressed six key themes for investors to consider in 2015. The following is a summary of these “MegaTrends,” which are further detailed in the TrendLines® publication.
1. WAGE GROWTH IS FLAT, BUT DISPOSABLE INCOME IS UP
As 2014 drew to a close, headlines blared about the rebound in confidence among American consumers. With consumer spending responsible for approximately 70 percent of gross domestic product (GDP), it is imperative that consumers spend money in order for the overall economy to expand. Following the Great Recession of 2007 to 2009, consumers retreated to a safe but painful place, paying off debt and tightening household budgets in order to ensure they could handle a lost job or a reduction in wages. By late last year, the consumer was back, with consumer confidence indices showing that sentiment had finally rebounded to pre-recession levels.
2. THE REGIONAL ECONOMY IS RECOVERING, BUT NOT RECOVERED
Regionally, the economy has continued to face headwinds through the recovery period. Job growth has been sluggish as the impact from federal austerity persists. Other major metro areas have outperformed the Washington metro area as their job growth depends mostly on the private sector and is not nearly as affected by federal austerity. In the 10 years prior to when federal austerity measures began in 2011, the federal government contributed an average of 6,200 jobs per year to the regional economy. In 2014, the federal government contracted by an average of 8,600 positions based on the most recent data available. Peak attrition occurred in March 2014, when 11,300 positions were cut (on a trailing 12-month net basis).
Sectors outside of the federal government and contractors have been picking up the slack. These other sectors generated 37,200 new payroll jobs during the 12 months ending in November 2014, which is on par with the historical average of the Washington metro area’s overall performance.
Not all jobs are “payroll jobs.” A second source of job growth is not captured by the Bureau of Labor Statistics’ (BLS) payroll job survey, which leads to the under-reporting of jobs and a mistaken impression of the region’s economic vitality. BLS’s data corresponds with workers subject to a W-2 tax form, which does not count workers who fill out 1099 forms. When this is taken into account, from January through October 2014, there was an average 12-month net gain of more than 28,000 employed residents versus an average 12-month net gain of just over 12,000 payroll jobs.
3. CONSUMER BEHAVIOR IS CHANGING
Consumer behavior has a major impact on commercial real estate, as it influences demand for different property types and specific classes within each property type. That impact makes it essential to understand what factors are influencing consumer behavior and exactly how it is changing.
One major influence on consumer behavior is consumer debt. The types of debt consumers take on, as well as how much total debt they have, dictates a large part of their behavior. Total consumer debt declined in the years following the recession as consumers paid off their debts. This especially holds true for mortgage and credit debt, which experienced declines as high as 16 and 23 percent, respectively. However, more recently, consumers have begun taking on more debt. Since bottoming out in the second quarter of 2013, total consumer debt has risen 5.0 percent. An increase in consumer debt, to an extent, is a healthy sign and good for the economy, if it’s not overdone. Looking ahead, increased consumer spending will need to be supported by higher wages in order for it to continue.
4. TENANT BEHAVIOR IS CHANGING
Net new demand for commercial real estate is no longer measured in the traditional way. While job growth and population growth remain highly important, how tenants occupy space also is critical. As Delta Associates reported last year, the question is no longer, “How much space do you need?” but rather “How do you plan to use the space you have?”
5. REAL ESTATE IS NOW AN EXPERIENCE, NOT JUST A LOCATION
As the world becomes more connected through the Internet and social media, the intersection of demographics, technology and changing consumer preferences has had transformative effects on the future of the commercial real estate industry. The average consumer is now younger and more informed, forcing developers to adapt in order to succeed. Successful mixed-use projects offer an encompassing live/work experience. From a development economics perspective, these projects benefit from economy of scale, critical mass, synergies between uses and operational efficiency. As urban centers continue to grow and thrive, Delta believes forward-thinking developers that keep the big picture in mind can deliver unique and exciting communities.
6. REAL ESTATE IS A PREFERRED INVESTMENT VEHICLE BOTH NATIONALLY AND LOCALLY
Over the last few decades, our nation’s capital was a beacon for investment from major players across the commercial real estate spectrum. The federal government pulled the strings for the regional economy and the private sector was coming of age. However, in recent years the challenges affecting the regional economy have influenced investor sentiment. Average returns for all product types have trailed the U.S. average and many of Washington’s peer metros. Washington and many other core markets already recovered much of their value earlier in the current cycle, and competition for top-tier assets is fierce. But, looking at investment sales volume, pricing and other metrics, there have been increases every year since the Washington metro area market bottomed out in 2009.
Delta Associates’ overall conclusion has been echoed time and time again: Investors targeting assets in Washington are in it for the long haul.
In Delta Associates’ view, the Washington market will continue to attract significant capital thanks to its appeal as a gateway city and the safety/stability that core assets will continue to provide investors. Well-located properties will be able to weather regional economic challenges, and fundamentals should improve over time. Foreign investors are comfortable with the long-term dynamics of the Washington market and continue to invest capital here.
The next generation of growth in Washington’s economy and commercial markets is likely to attract additional investor attention, as property fundamentals catch up with investment capital flows.
Following the market overview presentation at TrendLines®, Transwestern, Delta Associates and their sponsors – Baker Tilly and PNC Real Estate – honored two individuals who have made unique and innovative contributions to the commercial real estate industry as a whole and to the Washington, D.C., region in particular. This year, they paid tribute to Lerner Enterprises represented by Principal Mark D. Lerner and Vornado/Charles E. Smith President Mitchell N. Schear as “TrendSetters of the Year” for 2015.
Founded in 1952 by Theodore N. Lerner, Lerner Enterprises has emerged as one of the largest family-owned real estate developers in the greater Washington, D.C., area. The breadth of the firm’s holdings includes real estate, professional sports franchises and private equity investments. Lerner’s portfolio includes signature, award-winning projects such as Washington Square in the District of Columbia, The Corporate Office Centre at Tysons II, Dulles Town Center in Virginia and 2000 Tower Oaks Blvd., a LEED® Platinum certified office building in Maryland, among others. The principals of the company include Lerner, his son Mark and his sons-in-law, Edward L. Cohen and Robert K. Tanenbaum. In 1999, the Kogod School of Business at The American University voted them “Family Business of the Year,” and in 2008 they were named “Visionaries of the Year” and “Most Influential Commercial Real Estate Company” in the Washington area by Bisnow.
Lerner has been instrumental in creating dynamic places for Washington residents to live, work and play. In addition to significant professional accomplishments, Ted, Mark, Ed and Bob each holds numerous volunteer positions within the community that provide support to a wide array of worthwhile organizations. The Annette M. and Theodore N. Lerner Family Foundation and the Washington Nationals Dream Foundation were both started by the Lerner family in an effort to enhance the national capital region by developing beneficial community partnerships. For the company’s visionary leadership and extraordinary record of achievement, Transwestern, Delta Associates and their sponsors are very pleased to honor Mark D. Lerner, accepting on behalf of Lerner Enterprises as this year’s Private Company TrendSetter of the Year.
TrendSetter recipient Mitchell N. Schear, president of Vornado/Charles E. Smith, directs the performance and growth of a vast portfolio exceeding 20 million square feet in the Washington, D.C., region, including office, apartments and retail space. Vornado/Charles E. Smith is part of a fully integrated real estate investment trust recognized as one of the largest owner/managers of commercial properties in the country. Mitchell is well-known for leading the development of some of Washington’s most iconic projects including The Warner, 1999K, WestEnd25, 800 17th St./PNC Place and more. In Crystal City, where Vornado owns approximately 8 million square feet, Schear is transforming the neighborhood into a vibrant, creative community featuring a new residential concept by WeWork; the Crystal Tech Fund; TechShop’s maker studio; new incubators for growing tech companies; great restaurants; and more.
Beyond his many professional successes, Schear is equally well-regarded for his countless philanthropic activities, notably his devotion to Higher Achievement, where he has rallied Washington’s business community to raise millions of dollars to support at-risk middle schoolers. For his steadfast leadership of Vornado/Charles E. Smith and his exemplary record of service to our community, Transwestern, Delta Associates and their sponsors are very pleased to honor Mitchell Schear as this year’s Public Company TrendSetter of the Year.
ABOUT DELTA ASSOCIATES
Delta Associates, the research affiliate of Transwestern, is a firm of experienced professionals which has been providing consulting and subscription data services to the commercial real estate industry for more than 30 years. For more information, please visit www.DeltaAssociates.com.
Transwestern is a privately held real estate firm specializing in agency leasing, property and facilities management, tenant advisory, capital markets, research and sustainability. The fully integrated global enterprise leverages competencies in office, industrial, retail, multifamily and healthcare properties to add value for investors, owners and occupiers of real estate. As a member of the Transwestern family of companies, the firm capitalizes on market insights and operational expertise of independent affiliates specializing in development, real estate investment management and research. Transwestern has 34 U.S. offices and assists clients through more than 180 offices in 38 countries as part of a strategic alliance with Paris-based BNP Paribas Real Estate. For more information, please visit transwestern.com and follow us on Twitter: @Transwestern and @TranswesternDC.